Bitcoin tax fight brewing as digital chamber set to battle IRS

Users of virtual currencies like bitcoin are backing an industry group to oppose tax authorities’ efforts to collect detailed information about the customers of a popular digital currency exchange.

The tax group was formed because the Chamber of Digital Commerce believes a U.S. government summons for broad user information against Coinbase Inc. would, if successful, set a terrible precedent, said Perianne Boring, president of Washington D.C.-based CDC. Members of the Digital Assets Tax Policy Coalition are so worried, Boring said that they don’t want to be publicly named as participants for fear of being targeted by the Internal Revenue Service.

“The companies are very afraid to speak out, so the chamber will be the face of this,” Boring said.

The IRS in 2014 classified all virtual currencies as property for tax purposes, meaning the assets -- much like a home -- can be sold at a profit and trigger tax implications. In November the agency served a summons against Coinbase, seeking details about customers who traded digital currencies from 2013 to 2015. If the government has its way, it could open the door for similar actions against the rest of the industry, said Boring.

Matthew Leas, an IRS spokesman, declined to comment on the issue, citing the agency’s litigation against Coinbase.

Bitcoin has grown into the largest digital currency in the world, with a market value of about $20 billion. Like ether and other virtual currencies, bitcoin is made possible by a blockchain, a type of software that works as an account ledger on computers all over the world.

The ledger tracks, verifies and records every use of a bitcoin to ensure the coins are valid and makes it almost impossible to change a past transaction. Bitcoin users are difficult to trace as the entire network, including their identities, is encrypted with no central authority keeping track of who’s who.

Coinbase, based in San Francisco, said in a January post on its blog that it agrees with the IRS that users of digital currencies need to pay their taxes, and noted that the exchange has in the past responded to the agency’s subpoenas for specific customers.

“Their most recent subpoena asks us to turn over records on all customers (including transaction history, IP addresses, transcripts with customer support, etc),” Brian Armstrong, co-founder and CEO of Coinbase, said in the blog post. “We feel the IRS’s subpoena is overly broad and incorrectly implies that all users of virtual currency are evading taxes.”

The company has filed procedural motions in the case, David Farmer, a director, said in an email. The timing of enforcement proceedings has yet to be determined and is outside Coinbase’s control, he said.

The IRS action against Coinbase was in the form of a John Does summons. While the tax authority said at the time that Coinbase was not being accused of wrongdoing, “the IRS uses John Doe summonses to obtain information about possible violations of internal revenue laws by individuals whose identities are unknown,” the agency said in a November statement.

The CDC is using Steptoe & Johnson LLP as a legal adviser for the tax group, according to an announcement on Wednesday.

“Tax solutions that allow the IRS to do its job without resorting to actions such as a John Doe summons will be of benefit to all,” Jason Weinstein, a partner at Steptoe and co-chair of its blockchain and digital currency practice, said in the announcement.